Don’t ignore the other Europe, the growing one

Commentary: Parts of Eastern Europe are hot places to invest

By

MatthewLynn

LONDON (MarketWatch) — A debt crisis that seems to go on without end. A currency in turmoil. A deepening recession, a banking crisis, and states that may split up. Investors hardly need much persuasion to stay away from Europe. If they want safety and stability they can park their money in the U.S. or Japan. If they want rapid growth, they can look to Asia or Africa. Europe has become, understandably, the least attractive home for anyone’s money.

But there is a whole other Europe that has escaped the euro zone’s debt crisis. It is booming. And with a combination of rapid growth, pro-business policies, and political stability, it may well provide some of the most attractive investments in the world right now.

Reuters

Poland is booming, as the skyline of Warsaw shows.

Even in a continent that is struggling to keep its economy afloat there are some bright spots. Not every state is a member of the euro
EURUSD, -0.0910%
And even if most of them are in trouble, not every euro-zone state is drowning in debt or sliding into a long-term depression.

So where are the success stories?

Take a look at the newly free-market Georgia. A small state, with a population of just 4.5 million, it might be best known as Stalin’s birthplace but it has long since shaken off the legacy of its most infamous son. It has little in the way of natural resources itself, but, rather like Dubai or Singapore, is turning itself into a trading hub for a region rich in mineral and energy wealth.

For example, it only takes 15 minutes to register a car in Georgia, compared with days in neighboring countries. The result? The country has emerged as the center for importing vehicles destined for Russia or Azerbaijan.

Simple visa rules have made it the place to go to get deals done, and have made it an import and export center for places with far bigger populations. The reward for that free-wheeling, entrepreneurial approach to business has been growth rates of 8%-plus.

“We expect Georgia to be one of the fastest-growing economies in the region for years to come,” argued Charles Robertson, chief economist at Renaissance Capital, in a recent note on the country.

Way up to the north, on the border with Russia, Estonia is forecast to grow at 2.5% this year, even though it is a member of the crisis struck euro zone.

The country, which was part of the old Soviet Union, was hit as hard as any by the financial crash. It went through an agonizing regime of austerity in order to bring its deficit under control and qualify to become the 17th member of the euro zone.

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A third of workers on the state payroll were sacked and public-sector salaries were slashed by 40% — if Barack Obama wanted to try that we wouldn’t all be worrying about the fiscal cliff. It was harsh, but while austerity has been a failure in the rest of the euro zone, it has worked there. The country now has one of the fastest growth rates in Europe and one of the lowest deficits as well.

Its neighbor Latvia is no slouch either. Outside the euro, the country grew by around 4% in 2012 and should achieve a similar performance this year. It may be eligible to join the single currency by next year — if there is still a euro to join, that is.

It is not just small countries that are doing well.

Poland’s robust economy has slowed a little but is still forecast to grow at 2.5% this year. It was the only major country not to go into recession during the crash of 2008-09 and has expanded steadily ever since. As the army of hard-working Poles who flooded the rest of the European Union return to a more prosperous homeland, it can only strengthen further.

Not all the old Eastern European states are doing so well.

Romania is struggling. The Czech Republic, despite its proximity to Germany, and a tradition of manufacturing excellence that is as deep as that of its larger neighbor, is not doing as well as you might expect. The economy was back in recession in the last year. Slovenia joined the euro too early and was rewarded with one of the deepest recessions in the region in 2012.

And there are plenty of obstacles ahead for Europe’s fast-growth economies. As core Europe goes into recession — and Germany seems to be leading it that way at the moment — growth rates will inevitably suffer. Your close neighbors are always going to be a key export destination.

Banks may end up being hard hit if the financial system in Europe comes under new stress — and the loans on which many of the emerging markets rely may dry up. And euro-zone companies suffering at home will scale back investment — and they have driven the growth of much of emerging Europe.

But there are also huge advantages.

Take Poland or Estonia for example. They both offer rapid growth, plus all the legal and geopolitical stability that comes from membership in the EU. Your money should be safe in those countries. Is that true in China or South America or Asia? Probably not to the same extent. Is it true in Africa? Almost certainly not.

Or take a micro-state like Georgia. If it can become another Hong Kong — a trading hub in an often volatile region — then it can grow and grow. Not many other places offer those kinds of potential returns.

The euro crisis is not going to go away any time soon. But it should not blind investors to the wealth of opportunities the continent still offers.

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